The Wrap: RBA, Coronavirus & Telecoms

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Weekly Broker Wrap: rate cuts; coronavirus; telecoms; wealth managers; and gaming.

-Morgan Stanley, NAB economists push out timing of RBA rate cut
-If coronavirus contagion extends beyond 3-4 months then global economy could be impacted
-String of issues dominating telcos in 2020
-Major uncertainties overhang retail wealth managers
-Two casinos in one location heralds margin risk
 

By Eva Brocklehurst

Rate Cuts

Morgan Stanley is moving the timing of a cut to the Reserve Bank of Australia's cash rate to April from February, believing the February 4 meeting lacks a catalyst. The case remains strong for a reduction in 2020, perhaps two, as forward labour indicators suggest a softening over the first half.

Yet, the December labour market data was strong and the consumer price index was broadly in line with forecasts. That said, Morgan Stanley is still confident the RBA will cut and envisages a second reduction could transpire in August. Moreover, the broker assesses there is scope for a weaker Australian dollar as the market is underpricing both the timing of the first rate cut and the risk of a second.

National Australia Bank economists are also inclined to believe the RBA will stay its hand in February and use the recent improvement in the unemployment rate to buy time.

The NAB economists expect a cut in April as well and a second one around mid year. By April it should be clear that private sector growth is flat, consumer spending is soft and the recent gains in employment will not be sustained. They expect the headwinds for consumption and business investment are likely to persist.

Coronavirus

Morgan Stanley observes the coronavirus has led to a suspension of economic activity and imposed pressures of both global and Chinese growth. The virus appears to be more contagious than SARS at its peak, with increased incidence of 790/day in the past five days.

The Chinese authorities have imposed intercity travel restrictions and extended national holidays by three days. The most affected industries are travel, entertainment and retail , while extended factory suspensions could weigh on industrial production and trade.

While there may be some adverse impact to first quarter global growth, the underlying drivers of a global recovery remain intact. If the situation extends beyond three or four months global growth could be further impacted.

Citi assesses coronavirus is hitting the global economy at the worst possible time of year, as it has coincided with Chinese New Year. The broker estimates 20-27% of Chinese visitors to Sydney Airport ((SYD)) arrive during February and March.

Wuhan, the city at the centre of the outbreak, has direct services to Sydney three times a week via China Eastern Airlines. The broker estimates the best case scenario for Sydney Airport is that the virus is contained in the near term and Chinese passenger numbers decline by -50% over February and March, affecting 2020 operating earnings (EBITDA) by less than -0.5%.

A worst-case scenario could be a -5% decline in 2020 international passengers and this could affect operating earnings by -5-7% the broker assesses the potential impact on Auckland International Airport ((AIA)) is similar in a best case scenario but less severe in a bear case.

Telecoms

UBS notes two aspects of the National Broadband Network are being reviewed at the moment, including an inquiry by the Australian Competition and Consumer Commission (ACCC) into access pricing and a parliamentary committee inquiry into the NBN business case.

One of the issues relates to the NBN overbuilding existing RSP (retail service provider) fibre infrastructure and purportedly providing services directly to enterprise customers in contravention of its remit.

The broker notes a concession has been proposed, whereby NBN will commence a consultation and instead of overbuilding existing RSP fibre run a process in which it would request one a more pre-qualified suppliers to provide dark fibre, or run a reverse auction process and allow existing fibre network providers to bid for the right to supply.

UBS suggests this concession could be an incremental positive for RSP margins but makes no changes to forecasts. In the case of Vocus Group ((VOC)) NBN "mission creep" has little impact on near-term earnings and the existing customer base, while for Telstra ((TLS)) the broker remains comfortable with its estimate of the NBN gap being as large as $3.7bn.

Goldman Sachs agrees several issues will dominate the 2020 outlook for Australasian telecoms. One will be the Federal Court decision on the proposed merger of TPG Telecom ((TPM)) and Vodafone Australia.

The other issues include the outlook for mobiles, the earnings potential from a separation of Telstra's infrastructure business, and the NBN's corporate consultation. The broker has a Buy rating for Telstra, given its earnings trajectory on mobiles and an opportunity to still cut costs. There is also significant potential to crystallise value from the infrastructure.

Goldman Sachs upgrades Vocus Group to Buy from Neutral, to reflect a positive earnings trajectory in enterprise and an improved operating environment. The broker's least preferred stock in the sector is Spark Infrastructure ((SKI)) with a Sell rating as it is overvalued.

Wealth Managers

Morgan Stanley assesses major uncertainties are overhanging retail wealth managers. There are major earnings implications for the longer run from the elevated role of super trustee boards as well as for vertical integration.

There is also uncertainty over the capacity to execute on advice transformation and capture margins for shareholders. Unless AMP ((AMP)) and IOOF ((IFL)) can deliver an economical value proposition to planners and customers the risk of being irrelevant is real, in the broker's view.

While these are major issues for these two companies there is also some impact on Challenger ((CGF)). Morgan Stanley prefers IOOF, based on a greater capacity to execute and additional scale and synergies from the ANZ P&I acquisition. IOOF also has a simpler platform structure.

While AMP is working to complete its exit from the life business this is not guaranteed with several approvals outstanding. The broker forecasts wealth outflows for AMP of around -$4bn in the second half.

With the industry potentially seeking broader and more appealing options the structural tailwinds for annuities are less certain, Morgan Stanley points out, and falling bond and cash rates may present headwinds to retail demand and the margin outlook for Challenger.

Gaming

Aristocrat Leisure ((ALL)) remains the top pick for JP Morgan in the Australian gambling industry and Tabcorp ((TAH)) is the least preferred. The broker expects Tabcorp's wagering revenue will decline by around -5% this year.

JPMorgan also downgrades Star Entertainment ((SGR)) to Neutral because of a softer domestic outlook for the next 12 months. Recent trading history shows the stock is above its historical one-year PE average of 15.8x.

The broker believes the current discount to Crown Resorts ((CWN)) is warranted. Although initial interest in Crown's Barangaroo will be strong, when the facility opens in late 2020, the negative impact of two casinos in one location means the gambler has the ability to choose. Competitive promotions are likely to herald margin risk.

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